Bitcoin through the roof: a solid investment or a risky game?

The 100-thousand-dollar mark has been reached. Bitcoin has been worth more than ever since the re-election of President Donald Trump. What makes cryptocurrencies like Bitcoin so attractive and what are the consequences of the popular cryptocurrencies for the ‘real’ economy?

This week it was announced that one Bitcoin is worth more than 100 thousand dollars. Worldwide, interest in the currency has been boosted by the monstrous alliance that the cryptocurrency made with President-elect Donald Trump. The crypto industry supported his campaign, and in return, Trump promised deregulation of crypto trading.

Bitcoin and other cryptocurrencies are also popular with economics students on the campus in Tilburg. Many students have bitcoins or have had them before. Like economics student Yoël den Heijer: ‘Now I do not have any bitcoins. A while ago I did have them, and I did not know if they would rise further. Then I made a profit and thought it is good this way.’

Rik Schoordijk, also an economics student, recognizes this: ‘I exchanged them for shares, and they are also in the plus. That is more for the long term, bitcoins were for the short term.’

Lessons learned

Professor of Financial Market Infrastructures and System Risk Ron Berndsen has also owned bitcoins himself. Berndsen is an expert in the field of payment systems and cryptocurrencies, among other things: ‘In 2013 I had a few and they were twenty dollars each. I kept them on for my students. They could use it to make transactions, and, in this way, they learned how the cryptosystem works. Around 2017 they were worth a thousand dollars, so I sold my last bitcoins.’

Still, Berndsen would not recommend students to invest a lot in Bitcoin. ‘I would make solid investments, where you invest broadly in a stock market index. Then you have spread the case well. But it is instructive for economics students to experiment with a small amount of money in investments.’

Bubble

With his declaration of love for the crypto industry, Trump is making a hundred and eighty degree turn. The incoming president was initially not charmed by the new crypto coins. He even called it thin air. Berndsen can agree with that: ‘Although I have trouble agreeing with Trump, his original opinion was correct. It was and still is thin air.’

Nevertheless, economics student Den Heijer continues to believe in it: ‘I am considering investing again, because I know that the price of Bitcoin will only continue to go up. If I buy them now, they are a lot more expensive. But because they keep rising, I will still make a profit on them.’

According to Berndsen, why people continue to invest in crypto can be explained: ‘It is increasingly being embraced by broad layers of the population and also by the financial sector. As a result, there is always enough money flowing in to maintain the current price and even increase it.’

Game

Many students see crypto as a game. Economics student Shahab Ghasemyar: ‘I never had them, but I did trade with bitcoins and made some profit on that. I then predict whether the price will go up or down, and based on how the market reacts to that, I can make a profit from it.’

Den Heijer: ‘It is exciting, because of course it is about real money that you must invest. I like that.’ Ghasemyar: ‘In the future, I will be more involved with crypto. I then do Data Trade and that is quite risky. It is exciting because you are playing with your own money.’

Pyramid scheme

The risks are therefore high and not only for students or individual investors. Under pressure from Big Tech cowboys like Elon Musk, Trump wants to deregulate as much as possible. The boss of the SEC, Gary Gensler, compared the trade in cryptocurrencies to ’the Wild West’ and imposed strict rules a few years ago.

Now that Trump is becoming president again, Gensler will step down as boss of the SEC. He will be succeeded by Paul Atkins who will have to remove the rules and obstacles of his predecessor to trading in crypto.

The Silicon Valley lobby has found an important ally in Trump and that could have serious consequences for the financial world, Berndsen warns: ‘Economic institutions guard the rules of the game of the economy and that task must be done independently of politics. This is a huge political interference.’

By further deregulating, the threshold for trading with bitcoins becomes even lower. Dangerous, Berndsen thinks, because Bitcoin is a lot like a pyramid scheme that is maintained by the newcomers who continue to feed the system. If there are no more newcomers, the game stops.

‘In economics, this is known as the Greater Fool Theory,’ says Berndsen. ‘You bought too high, but as long as you can find someone who is even ‘crazier’ than yourself, you earn back your investment with a profit. Until the end of the ride, when there are no more investors. Then the biggest fool isthe sucker, and the price drops very quickly.’

Federal reserves

Among economists, there is a fear that Donald Trump will soon force central banks to hold bitcoins as bank reserves. ‘That is of course madness,’ Berndsen predicts. ‘Money is based on trust. That confidence is supported by an independent central bank, which tailors an interest rate policy to the needs of the economy. If part of the money is invested in Bitcoin, it undermines confidence in the value of money.’

So, madness reigns when it comes to Bitcoin, and not common sense? Berndsen: ‘In the present time, with all the disinformation, there are a lot of so-called finfluencers. It does not matter if their story is right or wrong. Anyone who shouts something extreme gets attention and many followers. In addition, those finfluencers probably have a portfolio of cryptos that will only increase in value as a result.’

Tulip mania

‘It is typical of the mass hysteria,’ Berndsen sighs. ‘It’s hard not to get in, because you feel like you’re missing something.’ But it is not the first time that the financial world has been shaken up by hypes and the issues of the day.

In that respect, the current crypto hype resembles the Tulip Mania, a wind trade in tulip bulbs in seventeenth-century Holland. In addition, the price of a single tulip bulb rose to thousands of guilders at one point.

Berndsen: ‘A former president of the Dutch bank once compared Bitcoin to tulips. But if the bitcoin bubble bursts, you have nothing. When the tulip trade collapsed, at least you still had tulip bulbs that you could plant in the garden.’

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